Will The Fed Really “Normalize” Its Balance Sheet?

To begin with, how exactly does one define “normalize” in reference to the Fed’s balance sheet?  The Fed predictably held off raising rates again today.  However, it said that beginning in October it would no longer re-invest proceeds from its Treasury and mortgage holdings and let the balance sheet “run off.”

Here’s the problem with letting the Treasuries and mortgage just mature:   Treasuries never really “mature.” Rather, the maturities are “rolled forward” by refinancing the outstanding Treasuries due to mature.   The Government also issues even more Treasurys to fund its reckless spending habits.  Unless the Fed “reverse repos” the Treasurys right before they are refinanced by the Government, the money printed by the Fed to buy the Treasurys will remain in the banking system.  I’m surprised no one has mentioned this minor little detail.

The Fed has also kicked the can down the road on hiking interest rates in conjunction with shoving their phony 1.5% inflation number up our collective ass.  The Fed Funds rate has been below 1% since October 2008, or nine years.   Quarter point interest rate hikes aren’t really hikes. we’re at 1% from zero in just under two years. That’s not “hiking” rates.  Until they start doing the reverse-repos in $50-$100 billion chunks at least monthly, all this talk about “normalization” is nothing but the babble of children in the sandbox.  I think the talk/threat of it is being used to slow down the decline in the dollar.

To justify its monetary policy, Yellen stated today that she’s, “very pleased in progress made in the labor market.”  Again, how does one define progress?  Here’s one graphic which shows that the labor market has been and continues to be a complete abortion:

The labor force participation rate (left y-axis) has been plunging since 2000. It’s currently below 63%. This means that over 37% of the working age population in the United States is not considered part of the labor force. That’s close to 100 million people between the ages of 15 and 64 who, for whatever reason, are not looking for a job or actively employed. A record number of those employed are working more than one part-time job in order to put food on table and a roof over the heads of their household. Good job Janet! Bravo!.

The blue line in the graph above shows the amount of dollars spent by the Government on welfare. Note the upward point acceleration in the rate of welfare spending correlates with the same point in time at which the labor force participation rate began to plunge. Again, nice work Janet!

The labor force participation rate is much closer to the true rate of unemployment in the United States.  John Williams of Shadowstats.com has calculated the rate of unemployment using the methodology used by the Government a couple of decades ago and has shown that a “truer” rate of unemployment is closer to 23%.

The true level of unemployment  is definitively the reason why the rate of welfare spending increased in correlation with the decline in those considered to be part of the labor force.   It could also be shown using the Fed’s data that another portion of the plunging labor force participation rate is attributable to the acceleration in student loans outstanding.  I would argue that part of the splurge in student loan funding, initiated by Obama, was used to keep potential job-seekers being forced by economic necessity from  seeking jobs and therefore could be removed from the labor force definition, which in turn lowers the unemployment rate.

As I write this, Yellen is asserting that “U.S. economic performance has been good.”  I’d like to get my hands on some of the opioids she must be abusing.  Real retail sales have been dropping precipitously (the third largest retail store bankruptcy in history was filed yesterday), household debt is at an an all-time high, Government debt hits an all-time high every minute of the day and interest rates are at 5,000 year lows (sourced from King World News)

Note to Janet:   near-zero cost of money is not in any way an attribute of an economy that is “doing well.” In fact, record levels of systemic debt and rising corporate and household bankruptcies are the symptoms of failed Central Bank economic and monetary policies. This is further reinforced by the record level of income disparity between the 1% highest income earners and the rest of the U.S. labor force.

The entire U.S. economic and financial system is collapsing.  If the Fed truly follows through on its threat to “normalize” its balance sheet and raise rates, the U.S. will likely collapse sometime in the next couple of years. On other hand, up to this point since Bernanke’s famous “taper” speech in May 2013, most of the Fed’s statements with regard to hiking rates (hiking them for real) and reducing its balance sheet has been nothing but hot air.  And in fact, unless the Fed reverse repos its balance sheet back to the banks, it’s assertion of “balance sheet normalization” is nothing more than another in long series of lies.

8 thoughts on “Will The Fed Really “Normalize” Its Balance Sheet?

  1. > And in fact, unless the Fed reverse repos its balance sheet back to the banks, it’s assertion of “balance sheet normalization” is nothing more than another in long series of lies.

    “Yellen Admits The Fed is Dependent on Stock Price Levels When Determining Rate Hikes, Inflation is a Mystery”

    “As a reminder, in June of 2016, Yellen said that the Fed does not target stock prices, and 1 year later is saying that they do. This is not the first time, nor will it be the last, in which the Fed has lied to the American people and backtracked on previous statements. Yet no journalist in the room dared to ask her about such a statement. ”


  2. “The last duty of a central banker is to tell the public the truth.” – Alan Blinder, former Federal Reserve Board Vice Chairman

    …and until the day arrives when central bankers do start telling the truth (I’m not holding my breath), remember what The Bard had to say…

    “It is a tale told by an idiot, full of sound and fury signifying nothing.” ― William Shakespeare, Macbeth

  3. Dave,

    Unfortunately there something that needs correcting in this article. There are not 100 million people between the ages of 15 and 64 who, for whatever reason, are not looking for a job or actively employed. More like about 100 million people who are age 16 years and older who are not looking for a job or actively employed (many of them for good reasons).

    The Labor Force Participation Rate includes people age 16 years and older.


    As does the “Not in Labor Force” category which numbers about 95 million people.


    The 100 million includes about 38 million retirees, about 15 million full-time high school and college students, about 10 million people who stay-at-home to take care of a family and about 15 million who are permanently or temporarily disabled or ill.


    1. Sure. However you want to interpret Govt propaganda. “Not In Labor Force” is about 95 million – I rounded up to 100 million. Retired? Sure. Next time you go to Walmart or Home Depot ask the greeters if they are “retired.” When you have a blog, feel free to write commentary based on verbatim translation of Government propaganda. I’ve been studying this issue for more than 2 decades and “Not In Labor Force” is largely people who would like to work but have either given up or have been saved by the expansion of entitlement programs under Obama and continued under whatever you want to call the person now occupying the Oval Office.

    2. 38 million retirees at, or under, the age of 64! Think about that number for a moment – a number larger than the population of Canada. I live in a retirement community in Palm Springs and half of them are still working.

      1. RTRider,

        Read again what I said. The age range is 16 years and older. Not 15-64. Most of those 38 million retirees are 65 and older, not under 64.

  4. Heaven forbid what a great FRED chart will be forwarding this. Ah to remember when negative rates meant that nominal rates were lower than the inflation rate….Now they are really negative in Europe and Japan not counting inflation. People look at me like I am from outer space when we discuss low rates and actual negative rates around the world. Might as well be discussing quantum physics. Gotta go there is a game on every freaking minute of every day…well almost. I few months ago I thought people were starting to grasp the situation. Now following the hurricanes and Trump’s betrayals I think they are wanting to live in a fantasized safe space. Denial is so much easier until it isn’t.

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload CAPTCHA.